Stockbrokers take capital gains tax row to High Court

The taxman is mulling suspension of the capital gains tax (CGT) on share transactions citing implementation difficulties, even as stockbrokers moved to court to challenge the new levy.

The Kenya Revenue Authority (KRA) commissioner-general John Njiraini on Monday said the tax could be deferred to allow for time to agree on implementation with stockbrokers.

The tax – set at five per cent of transaction gains – became effective on January 1 but stockbrokers have not started collecting it, citing implementation difficulties.

“We are thinking of the available options to deal with the matter. We realise there are issues to be dealt with. Deferring the matter is one option,” said Mr Njiraini.

On Monday the stockbrokers turned to the High Court in a bid to fight off the tax after collapse of dispute resolution talks that have been ongoing for the past three weeks.

The Kenya Association of Stockbrokers and Investment Bankers (Kasib) wants to stop the taxman from implementing sections 10 (a) and 23 of the Finance Act, which re-introduced the CGT after 30 years.

Kasib argues that the two sections of the Finance Act as enacted on January 1 were assented into law by President Uhuru Kenyatta before being subjected to public participation.

The stockbrokers further claim that since introduction, the laws have led to a steady decline in activity at the Nairobi bourse.

Upon implementation, all investors are expected to part with five per cent of any gains realised from the trade of shares in the securities exchange, which will be deducted by stockbrokers.

Stockbrokers will also be compelled to calculate all investors’ net gains and submit them to the taxman.

Stockbrokers now want the laws scrapped, arguing that it will violate investors’ guaranteed right to property if they are allowed to stand.

“Upon perusal of the Finance Act 2014, Kasib noticed a number of key changes that were introduced when the Bill was being discussed in Parliament. The amendments were not shared with members of the public. Trading volume on the NSE has dropped by over 70 per cent since the introduction of the capital gains tax,” Kasib says in court papers.

READ: Stockbrokers now hire top law firm to file case over tax

The Bill as published on June 12, last year did not have the contested provisions. Kasib has also faulted the National Assembly for not giving enough information to Kenyans so that they could exercise their right to political participation.

Kasib holds that the amendments are mostly similar to those that existed prior to the law’s suspension in 1985, and cannot be implemented as the mode of operation in the NSE has drastically changed over the last three decades.

Justice Isaac Lenaola directed the stockbrokers to serve the KRA and the Attorney General, who has been enjoined to the suit, and appear before him Tuesday.

Kasib added that no modern securities exchange such as itself requires stockbrokers to act as tax agents with respect to CGT collections.

“The provisions are largely the same as those prior to 1985. The administrative burden of trying to calculate and verify capital gains tax for each of the 3,000 transactions that are conducted on average each day has been placed on only 19 licenced brokers. It is practically impossible to effect the collection and remission in these circumstances,” said Willie Njoroge, Kasib’s CEO.

The CGT, stockbrokers claim, will not be of much value to KRA as only 20 per cent of investors in the Nairobi bourse will be affected by its implementation.

Some stockbrokers are said to be retaining five per cent of gross proceeds rather than the gains on investors’ transactions. This is because they could not determine or confirm the price at which shares were acquired, which would in turn help in estimating the CGT.

The proceeds are being retained in the clients’ accounts, awaiting the outcome of the engagement with the KRA. The retention is on the basis that the client agrees that the amount due is forwarded as CGT once the impasse is resolved.